10-Year Treasury Yield Falls Ahead of Data, Fed Meeting

By Johanna Bennett

U.S. Treasury prices moved higher, for the most part, Tuesday morning ahead of data on consumer prices and a home builders’ index, and with the Fed’s last meeting of the year due to start.

The yield on the 10-year Treasury bond fell to 2.876%, down from the 2.88% posted late Monday. The nd the yield on the five-year Treasury note fell to 1.518%. Bond yields move inversely to bond prices.

The yield on the 30-year government note, however, rose to 3.897%.

At 8:30 a.m. ET, consumer prices for November will be released. Economists are forecasting a rise of 0.1% and the same increase for the core rate, which strips out food and energy. Headline inflation fell 0.1% in the prior month. In the 12 months ended October, consumer prices rose 1%, and 1.7% on a core basis, with both well below the Fed’s target of 2% to 2.5%.

Current-account data for the third quarter will also be released at 8:30 a.m., while later at 10 a.m. ET, an index of sentiment among home builders is expected to rise to 56 in December from 54 in November, according to estimates.

Tuesday also marks the start of the Federal Reserve’s much-anticipated policy meeting, where there are some expectations that the central bank could decide to start withdrawing its stimulus when it concludes on Wednesday—a process that has become known as tapering.

Of course, inflation and housing data will be watched closely. The Fed meeting, however, is the focus this week, and many analysts are split over whether the Fed will decide to slow down its $85-billion-a-month bond buying program, or wait until 2014 to make a move.

Adrian Miller, director of fixed-income strategy at GMP Securities, wrote this in a note published Tuesday morning:

…the market will digest the important November CPI data where inflation at the consumer level is expected to remain quite muted… as long as inflation remains anchored around current levels and the economy continues to show improvement the Fed will be successful at beginning to taper, (January, in our view) while holding the Fed Funds rate near zero into the first part of 2016. And the ability of the Fed to properly manage the toning down of its asset purchases in a deliberate fashion while convincing the bond market the Fed will not end accommodations too early or risk a surge in inflation will be all about the success of its forward guidance policy. And with the architect of the Fed’s communication policy about to take the helm at the Fed and even if Stanley Fischer is nominated and later confirmed as Vice-Chair, we expect the Fed’s forward guidance program will ultimately be successful at negotiation the Fed’s exit, though certainly not without bouts of excessive rate volatility as inflation begins to creep onto the scene as money velocity increases.